Russia-Ukraine deal: Connotations for Central Asia – Part Two

Ashgabat, 23 Dec—Whether we equate it with Karate or Chess, the Russian bailout package for Ukraine is a brilliant move. Europe now finds itself between a hard place and Putin.

We shall return to it later. For now let’s look at the gas deal.

Heavy discount on gas

Gazprom agreed to slash gas price for Ukraine from $ 400 to $ 268.5 per thousand cubic meters. This is 33% discount and it will take effect form 1 January 2014.

Ukraine buys nearly 27 billion cubic meters of gas from Russia annually and the net impact of this discount would be about US $ 3.5 billion.

Viewed in isolation, this seems like an act of sheer recklessness by Gazprom, a global giant faced by so many internal and external challenges.

The profit of Gazprom for the year 2012 was Ruble 1210566 million (roughly US $ 36.316 billion). The discount to Ukraine comes to a hefty 10% of this.

Can Gazprom afford with 10% of its profits?

It doesn’t make much business sense unless we remember that the accumulated gas bills owed by Ukraine to Russia are now already around US $ 17 billion.

If Ukraine goes under, there is no guarantee when would it be able to pay back for the gas it purchased from Russia.

On the other hand, if it gets back to its legs, no matter how shaky, there would be some chance of recovering the accumulated debts and continue selling more gas to it.

In other words, the discount on the gas price is also an integral part of the bailout package.

If the biggest taxpayer of Russia is voluntarily giving up 10% of it precious profits, it shows how eager Russia is to keep the Ukrainian gas market – and, by extension, the European gas market – in its own hands.

Here is a crucial message for Central Asia.

With a thinner mat of Gazprom profits under his feet, Putin will fight mean, simply because the stakes are that much higher now.

With an emerging vacuum in Afghanistan next year, coupled with the need to keep a firm hold on the Ukrainian and European gas markets, Russia would be compelled not to play by the book, not that it plays strictly by the book now.

Putin is likely to prevent any gas pipelines from crossing the Caspian, no matter what it takes to do so.

What we know for sure is that the global gas market will not return to its phenomenal profits of 2008 anytime soon.

What we also know with certain degree of certainty is that global LNG battles between the USA and Russia are likely to begin just about five years from now.

Add to that the temporary glut caused by the shale gas in Europe.

What it all adds up to is that for now Central Asia should go slow on its pursuit of a Caspian gas route.

The expected profits from selling some gas to Europe are dwarfed by the risks in becoming a proxy fight field between Russia and Europe, with USA thrown in as an integral part of any global folly.

Can Central Asia afford to be a battleground between Russia on one side and USA-Europe on the other, with China scrambling to safeguard its interests in the region?

This is a question staring unblinking at every Central Asian country now, and the context is much broader than just the quest of another gas export route.